It’s the Monday after the collapse of Private Equity’s favorite bank. What’s the state of entrepreneurship?
When it comes to the impact of the failure of Silicon Valley Bank (SVB) on companies in the tech sector funded by venture capital, the weekend brought a range of analysis. An NPR story declared “Silicon Valley Bank failure could wipe out ‘a whole generation of startups.” Matt Levine of Bloomberg looked at the long-run impacts with more of a shrug, and was spot-on about Venture Capital’s herd-following echo chamber.
Either way, it has been an anxious weekend for VC-funded start-ups who kept all their spending money in SVB, especially if they have payrolls this coming week. Fortunately for all those firms, as Monday dawns, several approaches and sources to maintain their liquidity seem imminent, and Treasury Secretary Janet Yellen has told the press that SVB customers will have access to all of their money starting today.
Here’s our two cents (or some amount well within FDIC insurable limits):
Whatever you hear about how SVB’s failure is a shock to the system of venture-funded start-ups, most entrepreneurs and American entrepreneurship in general is just fine. SVB failed for specific and nearly unique reasons (as the Bloomberg article details) that don’t apply to most new or existing small businesses. Even more, the simple fact is that most entrepreneurs are not venture funded. Their private equity is not from “Private Equity;” it’s from bootstraps: friends, family, savings, maybe local loans or grants, and most importantly, operating profits,
This is a glaring reality, but it’s often forgotten in a culture obsessed with Shark Tanks and Unicorns. Our law firm represents growing businesses backed by private equity and sweat equity alike. But there are many more of the latter. The main street shops, agencies, consultants, software developers, manufacturers – the vast majority of the 32 million SMBs in the US, have almost no connection to Silicon Valley bankers or funders. (Except, of course, that they may be relying on the services of some cloud-based solution provider that is now temporarily on thin cash ice. Like, we got a reassuring email from Gusto…)
So we wouldn’t take the SVB failure as portending doom for the entrepreneurial economy. Unicorns are magical but ephemeral. It’s the quarter horses who pull the entrepreneurial weight over the long haul.
So what should a quarter horse do now? Here are four general recommendations:
Focus on fundamentals: The SVB failure is another case study in favor of the business operators who tend to their customers and cashflows.
Push back: A big lesson is, don’t just suck up a contract term or operational requirement just because your VC or investor puts it in their document template. Get your own lawyer to read the documents, ask questions, and push back – maybe starting with your VC’s requirement to put all your cash in one bank. (An alternative? Look up: “CDARS/ICS”)
Look broadly for options: Even in the few days since SVB failed, we’re already seeing lots of sources of potential relief and solutions, including emergency state programs to provide liquidity to SVB depositors. Shout-out to our home state NJEDA for reacting so quickly.
Every challenge is an opportunity: Remember the entrepreneur’s motto in bad times, often followed during the pandemic: “This sucks; how can we make money from it”?
